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Morning Briefing for pub, restaurant and food wervice operators

Thu 24th May 2018 - Update: NewRiver acquires Hawthorn Leisure for £106.8m, Young's results, C&C Group, Ei Group, Starbucks
NewRiver acquires Hawthorn Leisure for £106.8m: NewRiver, which owns a portfolio of about 330 pubs, has acquired Hawthorn Leisure from an affiliate of Avenue Capital Group for an enterprise value of £106.8m. This represents a net initial yield based on the value of the pub portfolio of 13.6% and will be satisfied using NewRiver’s existing resources. NewRiver stated: “As well as a portfolio of 298 community pubs, the acquisition includes an established brand and pub management platform, which could be applied across the company’s existing pub portfolio, generating significant scale-based synergies. NewRiver has identified the pub sector as an attractive investment to deliver on its business strategy. The sector generates high levels of low-risk, diversified cash returns and contains a number of in-built value creating asset management and development opportunities, including the potential to build convenience stores or residential units on surplus land adjacent to pubs.” Having acquired its first portfolio of 202 pubs from Marston’s in November 2013, NewRiver acquired its second portfolio of 158 pubs from Punch in 2015. NewRiver said the Hawthorn Leisure portfolio “provides attractive scale” for the company, increasing the size of its estate to 629 pubs. The combined NewRiver and Hawthorn Leisure estate will target scale-based synergies and other improvements in purchasing and logistics, and the company expects to realise synergies of at least £3m per annum. NewRiver chief executive Allan Lockhart said: “The acquisition of Hawthorn Leisure is absolutely aligned with our strategy of investing in retail and leisure assets at the heart of the communities across the UK. The portfolio is highly complementary to our existing pub portfolio and the combined portfolio remains below 20% of our total assets. We now look forward to applying our active asset management and risk-controlled development expertise to produce profitable opportunities for our occupiers, and growing and sustainable cash returns for our shareholders.” Chief financial officer Mark Davies added: “We are delighted to announce the acquisition of this high-quality portfolio of community pubs and a well established platform which will contribute significant funds from operations and be accretive to our net asset value. Having acquired our first portfolio from Marston’s in 2013, we are well aware of the attractiveness of the high cash returns generated by pubs, as well as their inherent active asset management and risk-controlled development opportunities. Importantly, we have also retained cost discipline on this transaction that we have tracked for some time, acquiring the portfolio at an attractive net initial yield of 13.6% and inheriting a strong brand and management platform. Having taken over executive responsibility for our pub portfolio, I look forward to working with our experienced management teams to establish a market leading business which will deliver synergies and drive highly accretive cash returns.” Hawthorn Leisure chief executive Gerry Carroll said: “The NewRiver acquisition is the best possible outcome for our people and 298 leased and managed pubs across England, Scotland and Wales. The deal provides a strong platform for our ambitious growth plans and ensures we not only retain all staff and our head office, in Marston Green, but the Hawthorn Leisure brand and values that we live by. NewRiver has bought into the Hawthorn Leisure team, as much as the pubs, so for us it’s business as usual. As such, we will continue to support our partners to achieve the best possible results and be famous for great people, great pubs and great propositions.” NewRiver also updated on its pub portfolio as it announced its full-year results. The company stated: “In November 2013, we acquired a portfolio of 202 pubs from (the ‘Trent’ portfolio). Each pub in the portfolio was hand-picked by management for its high roadside visibility, high passing footfall and prominent location, with the intention of converting a significant number for retail/residential use. The pubs had high occupancy and strong income returns, and consequently in September 2015 we acquired a second portfolio of 158 pubs from Punch (the ‘Mantle’ portfolio). As part of our active management of this portfolio, to date we have sold 20 pubs, including 11 in the current year, closed 11 for c-store conversion, including four in the current year, and acquired a further two pubs, both in the current year, and as a result we had 331 pubs remaining in our portfolio at year end. At the time of the Trent portfolio acquisition, we signed a four-year leaseback agreement with Marston’s, which came to an end in December 2017. We put in place a structured programme to transfer the management of the Trent pubs from Marston’s to NewRiver, and, through a detailed estate review involving all relevant stakeholders, we split the transfer into small batches in order to manage the programme effectively. Throughout the programme, which concluded in December 2017, our high-quality in-house team of pub specialists visited each site and worked with the publicans to ensure a smooth transition. Pleasingly, the majority of publicans chose to remain in their pubs following the transfer, and our operations managers and instructed solicitors have ensured that new leases and tenancies have been implemented seamlessly. For the minority of pubs where the publican intends to vacate, we are utilising our tried and tested lettings programme to recruit high -quality publicans who will continue to grow the business. Across the Mantle portfolio we have continued our programme of targeted capital investment in order to drive trade and increase values. During the period, we invested £1.1m in projects including external redecoration and improved signage to enhance curb appeal, internal refurbishment to enhance the customer experience and extensive works to improve kitchens, amenities and tenant accommodation. At the 47 pubs in the Mantle portfolio where we have completed refurbishment works, we have seen significant improvements to both rental income and sales volumes.”

Young’s reports managed like-for-likes up 7.5% since year-end: London pub retailer Young’s has reported a 7.5% increase in like-for-likes and sales up 11% in total in its managed estate in the first seven weeks since the year-end. For the year ending 2 April 2018 managed like-for-likes grew 4.2% with revenue up 6.9% to £266.4m. Total company sales rose 3.9% to £279.3m and adjusted operating profit was up 1.7% to £46.9m. Profit before tax was up 1.6% to £37.6m. Operating cash flow was £61.4m with the net debt to adjusted Ebitda ratio one of the lowest in the sector at 2.0 times. The Ram Pub Company (its tenanted business) saw like-for-like sales up 1.6%. There was total investment of £53.0m, in acquisitions, transformational developments and estate upgrades. Chief executive Patrick Dardis said: “I am delighted with this strong set of results, delivered against a challenging market backdrop, as they demonstrate the benefit of our strategy of running a differentiated, premium and well-invested pub estate in superb locations and with a highly customer-centric approach. We have continued to invest in our future growth through a combination of exciting acquisitions and investment in our existing estate while also upgrading our technology to enhance the customer experience and realise productivity gains. We’ve started the year well and, despite being up against very strong comparatives in the previous year, managed houses revenue in the first seven weeks was up 11.0% in total and up 7.5% on a like-for-like basis. Although uncertainty prevails in both the political and economic environment, we are confident that our strategy will continue to deliver superior shareholder returns. I am a firm believer that the traditional British pub will never go out of fashion and, as a result, I’m both excited and optimistic about the year ahead.” The company stated: “Our estate now has 255 pubs, predominantly across London and southern England. Last November we acquired the iconic Smiths of Smithfield and its smaller sister site in Cannon Street, which has just reopened having been rebranded as the Candlemaker. Smiths, a four-storey, grade II-listed building situated in the vibrant Smithfield Market, offers a unique experience on each level and has already achieved the highest weekly sales of any property within our estate. Having recently completed a major refurbishment project, we look forward to seeing the results. Just before the financial year-end we increased the total number of bedrooms in our hotel portfolio by 19.3% to 580 rooms through the freehold acquisitions of the Park (Teddington) with 43 bedrooms and the Bridge (Chertsey) with 51 rooms. The Park is a stunning Victorian building dating back to 1866 and occupies a prominent position in an affluent area within our own backyard. The Bridge, anchored on the Thames riverbank, has strong business and leisure guest appeal. We added two further freehold pubs through our purchase of the Chequers (Hanham Mills, near Bristol) and the Old Bear (Cobham), and one additional leasehold, the Bull (Bracknell). Following completion of its acquisition in May 2018, we are on site at the Naturalist (Woodberry Down), our 11th Berkeley Group pub. We are also poised to start fitting out our 12th in Kidbrooke Village. Within the existing estate, many opportunities remain. This coming year’s most exciting plan is a transformational development at the King’s Head (Islington) with its new dining room, events space and a stunning roof terrace. We also continue to invest in technology. By the end of this summer all our pubs will have new till software that will allow us to capitalise on greater sales opportunities and provide our general managers and teams with enhanced tools to continue to surprise and delight our customers. The new software will allow us to interact with multiple third party providers; our own app, ‘Young’s On Tap’, will also evolve to allow our customers to order in advance and receive tailored rewards based on their unique habits and preferences. Through our carefully selected growth opportunities and freehold-backed balance sheet, we are confident our strategy will continue to deliver. The ongoing development of our people and helping them achieve their full potential will create an even more vibrant experience for our customers who are at the forefront of everything we do. Once again, our managed houses have performed at the top of the pub sector, with strong revenue growth, up 6.9% to £266.4m, underpinned by industry-leading like-for-like sales growth of 4.2% (2017: 4.7%). Managed houses represent the vast majority of our business and our managed estate now comprises 181 pubs (including 25 hotels), an increase of eight pubs (including two hotels) during the year, making up 95.4% of our total revenue. Continuing to drive and challenge the pubs and their teams to outperform the market is a relentless pursuit, but it’s one that we embrace wholeheartedly. Our longstanding record of consistently raising the bar creates its own challenges, but our ambition and work ethic gives us that extra spring in our step to continue to excel. During the year we transferred three (leased) high turnover pubs to managed houses to maximise their potential – the Hope and Anchor (Brixton), the King’s Arms (Wandsworth) and the Lord Palmerston (Tufnell Park). Further transfer opportunities exist within the Ram Pub Company, which we will look to harvest when the time is right for both us and our tenants. We sold three pubs at the tail of the estate for combined proceeds of £2.1m – the Bell (Illminster), Court House (Dartford) and the King’s Arms (Epsom). In February 2018, we acquired the Old Bear (Cobham), an attractive 16th century pub situated in the heart of an affluent Surrey town. As a result of the above movements, the Ram Pub Company ended the year with 74 pubs, down from 79 in the previous year. We welcomed the Old Bear (Cobham) and its tenant into the Ram Pub Company flock following the purchase of this freehold pub. Within our existing estate, we follow a structured and viable investment programme to ensure that each tenanted pub is maintained at an attractive standard to appeal to customers, current tenants and future business partners. In the past year we’ve completed major developments at the Bristol Ram, Gardeners (Wandsworth), Grand Junction Arms (Harlesden), Grove House (Camberwell), Heartbreakers (Southampton), Prince William Henry (Southwark), Red Cow (Richmond) and the Robin Hood (Sutton). We have certainly enjoyed a couple of very warm and sunny weeks recently. The first May Day bank holiday was a record breaker for many of our garden and riverside pubs. A welcome boost at the start of the new financial year, when we are up against very strong comparatives in the previous year. Our pub individuality, alongside our ability to give our talented general managers the freedom and flexibility to continue to innovate, is paramount to our continued success. This coming year, we face the second consecutive business rates increase, this time circa £1.6m (2018: £1.8m). Although we welcomed the chancellor’s announcement in the spring statement to bring forward the next rates valuation, we were disappointed that it didn’t go far enough to modernise the method of calculating business rates in this growing digital age. Against cost pressures, we’re confident that the investments we’ve made during the past year will continue to propel us forward. We still have plenty of opportunities to invest in our existing estate and we will also start to see a good return from the recently acquired Park (Teddington) and Bridge (Chertsey). Our new pub the Naturalist (Woodberry Down) also opens its doors later in the year. We are active in the acquisition market. Whilst we have the necessary firepower thanks to our robust balance sheet, our strict internal investment criteria remain – for us it’s about quality. We believe plenty of opportunities exist in our sector. Although uncertainty prevails in both the political and economic environment, we are confident that our strategy of running differentiated well-invested, individual, premium pubs in high-demand locations will continue to deliver superior shareholder returns. By remaining flexible in our offer and investing in our people and technology, we will also continue to deliver outstanding customer service. Together, these create a recipe where the traditional British pub will never go out of fashion. As a result, we’re both excited and optimistic about the year ahead.”

C&C Group chairman to step down: C&C Group, the manufacturer, marketer and distributor of branded cider, beer, wine and soft drinks, has announced Sir Brian Stewart will retire as chairman after eight years in the role at the annual general meeting on Thursday, 5 July. The company stated: “Following a thorough selection process, Stewart Gilliland, who joined the board as a non-executive director in 2012, has agreed to succeed Sir Brian as chairman. He has extensive experience of the drinks industry and has been a non-executive director of C&C since April 2012. He was chairman of Booker Group from 2015 until its acquisition by Tesco in March 2018, following which, he was appointed to the board of Tesco as a non-executive director. He is also a senior independent director of Mitchells & Butlers.” 

Douglas Jack – Ei Group nearing turning point due to segmentation strategy: Peel Hunt leisure analyst Douglas Jack has said Ei Group is nearing a turning point due to its segmentation strategy. Issuing a ‘Buy’ note on the shares with a target price of 165p, Jack said: “Ebitda has stabilised, despite like-for-like net income growing by just 0.6% in Pub Partnerships in the first half. This reflects investment and critical mass in the managed estate helping Ebitda to start growing in the converted assets, net of incremental central costs (which have now stabilised). Our forecasts assume no improvement in like-for-like net income, but, in 2018E, they do anticipate an increase in profits from conversion as a consequence of more stable central costs, and strong like-for-like growth in both managed and commercial leases. This also reflects managed and commercial leases reaching critical mass; lack of scale should no longer hold back margins. The return on investment on managed investments and operations was 16% and 21% respectively in the first half of 2018 for 186 pubs that had traded more than six months as at 31 March 2018, implying £7m of annualised Ebitda uplift. However, the net benefit in the first half from 319 managed pubs was less than £2m, reflecting the short-term impact of transitions and refurbishment downtime. Returns are slowing in the conversion programme, possibly as the best conversion opportunities have already been completed. Within Pub Partnerships, 90% of the like-for-like net income growth is due to drink margins. Although the estate’s quality continues to improve, the ability to grow like-for-like net income may diminish in line with marginal growth in buying terms. We remain very positive on Ei Group due to the company’s segmentation strategy, which is raising asset quality, enabling debt to be paid down, and putting the company in a position to return to total Ebitda growth. We estimate every 1% of debt reduction enhances equity value by 3.7% versus a 3.5% boost from every 1% of Ebitda growth. We believe stable central costs and growing managed profitability (managed margins are 400 basis points below that of larger peers) can result in Ebitda growth joining debt reduction in driving up equity value, as well as the price-to-earnings ratio rating.”

Starbucks – employee anti-bias training programme is first step in long-term journey: Starbucks has revealed details of the employee anti-bias training programme that will take place behind closed doors at 8,000 US company-owned stores on Tuesday afternoon (29 May). The company announced plans to shutter stores and corporate offices to train 175,000 employees after the controversial arrests last month of two black men, who were detained for hours after the manager of a Philadelphia Starbucks called police because they had not made purchases and refused to leave. The arrests of Donte Robinson and Rashon Nelson, who were waiting to meet a friend, sparked protests and calls for a boycott of Starbucks, which is known for its diverse workforce and liberal stances on issues such as gay marriage. Starbucks said the first training on May 29 “will serve as a step in a long-term journey to make Starbucks even more welcoming and safe for all”. It will include videos featuring Starbucks executives such as chief executive Kevin Johnson, executive chairman and co-founder Howard Schultz, board member Mellody Hobson, hip hop artist Common, store managers and experts from the Perception Institute. Employees also will view a film called “You’re Welcome” by Stanley Nelson and participate in discussion and problem-solving sessions on identifying and avoiding bias in every day situations, reports Reuters. Starbucks said the long-term programme is being designed and developed with input from researchers, social scientists, employees and other advisers. Since the Philadelphia incident, Starbucks has said it will allow people to sit in its cafes and use its toilets without making a purchase. It also said it has outlined procedures for dealing with customers who are disruptive, using tobacco, drugs or alcohol or sleeping in its cafes.

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